Revenue Shortfalls Bring Profit-Margin Caution: Chart of the Day

Growing disappointment with U.S.
companies’ revenue may be a harbinger of lower profit margins,
according to Myles Zyblock, chief institutional strategist at
RBC Capital Markets.

As the CHART OF THE DAY shows, the gap has widened this
quarter between the percentage of companies in the Standard &
Poor’s 500 Index that are exceeding analysts’ sales projections
and those coming out ahead on earnings. The figures are based on
comparisons with average estimates in Bloomberg surveys.

Fewer than 30 percent of S&P 500 companies are delivering
so-called positive surprises on revenue, according to the data.
The proportion has fallen from 52 percent a year earlier. S&P
500 earnings surprises have been more consistent, falling to
64.5 percent from 69 percent during the period.

“The heat is on for companies to preserve margins,”
Zyblock wrote yesterday in a report. Their success will depend
on pricing power, or the ability to raise prices without losing
business, the Montreal-based strategist wrote.

Broadcasters and cable companies, business-service
providers, homebuilders and tobacco producers are most likely to
sustain profitability, the report said. Zyblock based his
conclusion on an analysis of industry price indexes and net
margins, or net income as a percentage of sales.

Automakers, chemical companies, paper producers and
software makers are most at risk, he wrote. These industries
suffer from a combination of reduced pricing power and falling
net margins.